Intellectual Property Rights Protection, Complexity and FDI flows into China

Main purpose of this paper is to explain why large amount of foreign direct investment (FDI) flowed into low IPR protecting China and other emerging economies. There are two key assumptions, imitation costs are positively related to complexity and they are higher when imitating a product designed only for foreign market. By incorporating complexity into Dixit-Stiglitz Framework, the model shows that strengthening of IPR protection in the host country not only raises an MNE's profit and stimulates inward FDI, but also induce more high complexity FDI. Moreover, as cost-oriented FDI is less sensitive to host IPR protection, developing host countries with low IPR protection attract relatively more cost-oriented FDI. The model implies that strengthening of IPR protection can help emerging economies attract more complex FDI and increase the fraction of market-oriented FDI.